Opinion
No. 43530.
November 6, 1939.
Wilbur A. Giffen, of Chicago, Ill., for plaintiff.
Fred K. Dyar, Sp. Asst. to Atty. Gen., and Samuel O. Clark, Asst. Atty. Gen. (Robert N. Anderson, Sp. Asst. to Atty. Gen., on the brief), for the United States.
Before WHALEY, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHITAKER, Judges.
Action by Park Club, a corporation, against United States to recover a tax paid on dues and initiation fees.
Judgment for defendant.
The question presented in this case is whether or not the plaintiff was a social club during the period from February 1, 1930, to November 1, 1933, and as such was liable for tax imposed by section 501 of the Revenue Act of 1926, as amended by section 413 of the Revenue Act of 1928, 26 U.S.C.A. §§ 950- 952. The plaintiff insists that it was not a social club, but a luncheon club only.
This case having been heard by the Court of Claims, the court, upon the report of a commissioner and the evidence, makes the following special findings of fact:
1. Plaintiff was a corporation organized under the laws of the State of Michigan, and is located in the City of Kalamazoo, Michigan.
Plaintiff was originally incorporated on February 24, 1904, for a term of thirty years. The purpose clause in its charter was, "To promote social intercourse among its members and to provide for them the convenience of a club house."
2. On February 24, 1934, plaintiff filed a claim for refund for taxes paid from February 1, 1930, to November 1, 1933, on dues and initiation fees under the provisions of Section 501 of the Revenue Act of 1926, as amended by Section 413 of the Revenue Act of 1928, in the sum of $11,200.50. Said claim was based on the contention that the plaintiff was not operating as a social, athletic, or sporting club, as contemplated by the taxing act. This claim for refund was rejected by letter of March 20, 1935, rejection being based as to part of the claim on the bar of the statute of limitations, and as to the remainder, $10,214.50, the amount here involved, because, in the opinion of the Commissioner of Internal Revenue, the plaintiff was a social club. In the Commissioner's letter of rejection it is stated: "Careful consideration has been given to the evidence submitted. It is held, in view of the purposes of the club, as set forth in its articles of association, the clubhouse and facilities maintained for the use of its members, and the social features, such as card playing, ladies' bridge and tea parties, "open house" on New Year's day, etc., that the social features form a material purpose of the club and that it qualifies as a social club or organization within the meaning of section 501 of the Revenue Act of 1926, as amended by section 413 of the Revenue Act of 1928. The dues and fees paid by the members are subject to the tax under the provisions of the above-mentioned section of the Act."
3. The By-Laws of the plaintiff provided that the officers should be a president, vice president, secretary, and treasurer and that a Board of Directors of nine members should control its affairs. There was a financial committee, a house committee, and at different times a special membership committee.
The club staff consisted of a manager, bookkeeper, a chef and two cooks, a dishwasher, and four waiters; also a porter, a maid, a cigar clerk, and a bell boy.
The average number of members for the years covered by this suit was 202. The number ranged from 264 members at the beginning of the period to 120 at the end, the drop being due to the general business depression. About ten percent of such total represented nonresident members, and included in such total were, on the average, four special members representing widows and unmarried daughters of deceased members who were allowed to continue the membership but without voting privileges. The membership presented a cross section of the community, including businessmen and manufacturing executives, lawyers, doctors, accountants, and men who had retired.
All wives and unmarried daughters of members had the privilege of the facilities of those parts of the club property in which women were allowed. This covered opportunities for dining and entertaining.
Over 75 percent of the members were over 45 years of age. The dues were $12.50 per month for resident members, and $5.00 per month for nonresident members. In lieu of an initiation fee, a new member was required to purchase a share of stock of the plaintiff corporation either from another owner or from the plaintiff at a price to be determined from time to time by the Board of Directors. Such price ranged from $100.00 to $300.00. No member could hold more than one share of stock.
4. Kalamazoo, Michigan, was a city of 58,000 population, with manufacturing — mainly paper making — the chief activity. The clubhouse was an old residence which plaintiff purchased in 1926 and was located within one block of the business section and about two blocks off the main street. The building was constructed of red brick and red sandstone trim and was irregular in shape measuring roughly 40 feet in width and 90 feet in length. The lot on which the building stood was 60 feet by 132 feet, the back part being used for parking space for about 15 cars of the members. The plaintiff also owned the adjoining 60-foot vacant grassed lot, which was also used as an entrance to the parking lot. On the books the permanent assets of the plaintiff were carried at the following figures which represent the balances after deducting depreciation as of December 31, 1933: land and building, $113,654.72; and equipment and furnishings, $26,334.53.
5. The club building consisted of three stories and a basement. The equipment and furnishings of the club were substantial, attractive, and comfortable.
The basement had three dining rooms, 20 feet by 25 feet, 15 feet by 15 feet, and 12 feet by 25 feet, respectively. The aggregate seating capacity of these rooms was from 48 to 60 persons. In the basement there was also a kitchen, pantry, waiters' dressing room, food storage rooms, etc. All members were served luncheons here unless they had outside guests.
On the first floor there was located an entrance lobby, 14 feet by 20 feet, a lounge room, three dining rooms, a pantry, a washroom, and a ladies' dressing room to which there was a back private entrance which the ladies were required to use. From the entrance lobby, stairways led to the second floor and basement. In the lobby was a hat rack, cigar counter, and some furniture. A bulletin board was maintained in the lobby upon which were posted daily stock quotations. The lounge room which opened on an outside porch was 15 feet by 30 feet and contained two davenports, easy chairs, reading lamps, and a library table on which there were newspapers and magazines. The north dining room was 15 feet by 22 feet and had a table capacity for 14 persons. The middle dining room was 20 feet by 25 feet and contained six tables seating 16 to 20 persons. The south dining room was 14 feet by 30 feet and had a number of small tables. The latter dining room connected with the ladies' room. The two rear dining rooms were used by ladies or by mixed gatherings, and the various dining rooms on the first floor served all purposes except the noonday luncheon of the men members, which was served in the basement grill.
On the second floor there was a hallway which connected with a lounge room, four card rooms, office, a pantry, a washroom, and some storage space. The lounge was 36 feet long and of irregular width and contained davenports, desks, easy chairs, and lamps. Each of the card rooms had a table. Three of the tables were for four players each and one for six. The office occupied a space 12 feet by 12 feet.
On the third floor there was located a large room 40 feet by 50 feet, which was used once annually for a New Year's Eve dance. Once during the period in controversy this room was rented to one of the members for a dance. This room was equipped with a piano, chairs, and settees. On this floor there was also located a small bedroom for the manager's use.
6. The membership of the club consisted mostly of business and professional men and included most of the important corporation executives and businessmen of Kalamazoo. Certain manufacturing interests paid the dues for their officials and salesmen.
The noonday luncheon on weekdays was the principal meal served. Breakfast was never served. Meals in the evenings and on holidays and Sundays were served upon advance reservations. Such use of the club was substantial but much less than its use for lunch. The dinners served were about 10 percent of the total meals. The club set aside every Tuesday as men's night, when the members were encouraged to come to the club for dinner. The number attending varied from about two dozen to less than a dozen at the end of the period in question. Members and their wives attended dinner at the club when dinner was not served at their homes and on other occasions. Good foods at reasonable prices were served. Luncheons were served from 75 cents to 85 cents, and in the last half of the period involved a special 40-cent luncheon was also served. Other meals were $1.50. Members were frequently accompanied by out-of-town guests.
Card playing, bridge and cribbage, were engaged in by a substantial number of the members at the luncheon period. An average of about 80 persons per week out of a membership at the time of 140 played cards at the club during the year 1932.
7. Wives of members and their guests had the use of the middle dining room on the first floor when accompanied by a member; and there was set aside for the sole use of wives of members and their guests a ladies' dining room and dressing room. These facilities were used for luncheons, dinners, musicals, bridge parties, and the like. During the first twelve months of the period in question 48 such functions of sufficient importance to appear in the society columns of the local papers were held at the club, 19 the following 12 months, 22 the next, and 7 in the last 9 months.
8. For the twelve-months period ending June 30, 1932, which is typical of the 45 months covered by this suit, the approximate number and purpose of the individual visits to the club by the members, exclusive of their guests, were as follows:
Noon day luncheons .................................... 11,975 Other meals ........................................... 1,237 Visits without eating ................................. 300 New Year's Eve party .................................. 17
9. The following represents a typical twelve-month statement of income and expense during the period of this suit:
Income:
Club dues and transfer fees ...................... $28,101.88 Dining-room and cigar-stand sales ................ 17,980.20 Employees' meals ................................. 5,708.06 Revenue from cards ............................... 1,811.25 Miscellaneous .................................... 26.95 _________ Total income .................................. 53,628.34 ========= Expense:
Foodstuffs, cigars, cards, etc. .................. 15,491.32 Laundry, gas, china, printing, and miscellaneous supplies ....................................... 3,315.64 Salaries and wages ............................... 10,477.85 Meals for employees .............................. 5,735.81 Manager's salary ................................. 2,563.66 Bookkeeper's salary .............................. 1,037.19 Taxes and insurance .............................. 2,665.04 Repairs to building and equipment ................ 1,127.24 Heat, light, and water ........................... 1,765.02 Entertainment .................................... 111.65 Subscriptions, periodicals, flowers, decorations, stationery, office supplies, telephone, telegraph, postage, legal and professional expense ............................ 702.32 Interest paid .................................... 5,903.25 Bad debts ........................................ 821.75 Depreciation ..................................... 2,908.81 Miscellaneous .................................... 35.54 _________ Total expense ................................ 54,662.08 ========= Net loss ..................................... 1,033.74
10. Plaintiff had no library. It had no pool or billiard tables, no bowling alleys, and no gymnasium equipment of any kind. There was no entertainment committee. The club sponsored no picnics, no tournaments of any kind, no lectures, no movies, no musicals, etc.
11. The purpose of the club was to promote social intercourse among its members, and among the wives of members. The men availed themselves of its facilities principally at the lunch hour, some for purposes of their own businesses or professions, others for social intercourse and relaxation. Wives of members utilized it solely for social purposes. Its social features and activities were not incidental but were a material part of its operation. During the period in question it was a social club.
The plaintiff insists that it was nothing more than a luncheon club and so was exempt from taxation under section 501 of the Revenue Act of 1926, as amended by section 413 of the Revenue Act of 1928, 26 U.S.C.A. §§ 950- 952.
This section imposes a tax on the initiation fees and dues paid to "any social, athletic, or sporting club." The plaintiff insists that it was only a luncheon club in which social features were merely incidental and for this reason it insists that it is not subject to the tax.
We do not think the social activities of the Park Club were merely incidental, but were a substantial and necessary part of its life. The Club was run not only for the benefit of the members, but also for the pleasure of wives of members as well to a substantial extent. Wives of members and their guests had the use of the middle dining room on the first floor when accompanied by a member, and the ladies' dining room and dressing room were set aside for the sole use of wives of members and their guests. These facilities were used for luncheons, dinners, musicals, bridge parties, and the like. While the record does not disclose completely the extent of such use, it appears that during the first twelve months of the period in question at least forty-eight such parties were held or given which were of sufficient importance socially to appear in the society columns of the local papers. As the business depression set in the number diminished but it is evident that these functions, which were purely social in their nature, were a material part of the activities of the club.
Men and their wives frequently had dinner at the Club, and one night each week a portion of the Club was set apart for the use of the men only and they were encouraged to attend for dinner on that evening. In comparison with the number attending for luncheon, the number eating dinner was few, about one out of ten; but such is the history of all downtown clubs.
Nor can it be said that the luncheons attended by the men did not have their social aspect. Many ate luncheon there for the companionship of congenial spirits, for relaxation in the middle of the day, for entertainment, at cards or in the reading room.
The facilities for these things were provided by the club not to induce its members to attend its luncheons, but because such activities were an essential part of its life. See Fleming v. Reinecke, 7 Cir., 52 F.2d 449, 80 A.L.R. 1293; Chicago Engineers' Club v. United States, 80 Ct.Cl. 615, 9 F. Supp. 680; Transportation Club of San Francisco v. United States, 84 Ct. Cl. 253, 17 F. Supp. 201; Detroit Club v. United States, 86 Ct.Cl. 549, 22 F. Supp. 424.
We are of opinion that it was a social club and so subject to the tax imposed by section 501 of the Revenue Act of 1926, as amended.
Plaintiff is not entitled to recover, and the petition is therefore dismissed. It is so ordered.